For the first time in two years, optimism regarding the general business situation fell among UK manufacturers, and expectations of slower activity are driving a reappraisal of forward-looking business plans, according to a report published this week by the CBI.

Growth in total orders and production eased slightly in the three months to July and manufacturers expect a further deceleration over the next quarter. As a result, after a fourth successive increase in employment in this survey, they plan to cut headcount over the next three months and have revised down their investment plans for the year ahead.

Responding to the July Quarterly Industrial Trends Survey, manufacturers reported that they were less optimistic than three months ago (-16%), the first fall in sentiment since July 2009.

Fewer firms plan to invest in the year ahead to expand capacity, with more firms instead planning to replace existing capital and increase efficiency. In a further sign of easing capacity pressures, this has also fallen back as a constraint to output over the next three months (now cited by 20% of firms).

Ian McCafferty, CBI Chief Economic Adviser, said: "Orders and output growth in the manufacturing sector slowed slightly over the past quarter. This is in line with a broader slowing in production globally, with supply chains around the world impacted by the Japanese tsunami earlier this year. Sentiment has also been affected by concerns over the euro crisis, and the squabbling over the US debt ceiling.

"However, this slowdown is expected to persist into the third quarter. Consequently, manufacturers are now reappraising their business plans, with firms expecting to lower recruitment in the coming quarter and invest less in the year ahead. How far the slowdown will be borne out is yet unclear, but the combination of political and economic uncertainty is sapping confidence."

Commenting on the results, Chris Phillips, vice president, international marketing at talent management software supplier Taleo, said: "With reports suggesting that manufacturers plan to revise their business and investment plans for the year ahead, indications suggest that headcount will be a likely casualty. However, while many organisations may feel it necessary to reduce staff levels in line with production, it is important that this is not at the cost of future growth. People are still the strongest asset in any business. By retaining their top performers and those with skills critical to future growth, companies can ensure that they have the right talent in place for the future. "In the event that companies do reduce head count, the ability to identify these top performers and the critical roles within the organisation is going to be paramount. To do this effectively, companies need to have the necessary 'talent intelligence' to identify these pivotal roles. By introducing the right talent management technology, senior decision makers can gain valuable insight, which will help them to not only identify but retain and develop the top talent within their business. "While optimism in the manufacturing sector has decreased recently, there will be businesses that are still seeing growth, especially in the run up to the Olympics. Where recruitment is taking place, it is important that companies are hiring the best talent into the correct roles. This is something that we have seen Rolls-Royce do very well. Through the use of our recruiting software, Rolls-Royce has been able to refine and evolve its recruitment practices, enabling the organisation to attract high quality candidates, while reacting quickly to changing demands within the business."